Friday, October 3, 2014

The Housing Crisis in San Francisco

And not only San Francisco, but that’s the city in the news this morning. There’s a ballot initiative to impose a 24% tax on developers who eject their tenants and flip properties within five years after acquiring them. Behind this lies an explosive rise in rental prices, making the city increasingly unaffordable for all but the top few percent.

First, let’s clear away the bs and apply a bit of elementary economics. On one side you have a flack for the local realtors association saying, according to the journalist’s paraphrase, “the steeper tax would simply be passed along in the sale price.” On another you have supporters of the mayor touting a program to build an extra 30,000 units over a six year period. Both would do well to learn about the price elasticity of demand, which is the key piece of information for such questions. Tax increases on sellers are passed along depending on how inelastic demand is; if it’s relatively elastic they have to swallow most it themselves, which means that house prices would fall due to less lucrative development options. If you can’t flip you won’t pay as much in the first place. Meanwhile, the effect of any increase in supply on prices depends entirely on the same elasticity. (I’m assuming for convenience that the rental-to-price ratio in housing remains constant.) And what percentage increase in the housing stock does 30,000 units represent?

Do I know what this elasticity looks like in San Francisco? No I don’t, but if I were a journalist for the most influential newspaper in the country I’d take the time to find out. Message number one: journalists reporting on economic issues need to learn some economics.

(The one thing I’m pretty sure of, by the way, is that there is no single price elasticity of demand for housing in SF or anywhere else. Properties are unique, not only physically but in terms of their location, and each has its own elasticity. But averages would be OK in this situation, since we’re interested in average affordability.)

To its credit, the article discusses the issue of neighborhood stability, which is critical to any investigation of housing policy. Social capital in its many senses is an externality in the housing market and, at least in principle, justifies intervention. Whether a particular intervention does more good than harm, of course, is something that a priori theorizing is unable to answer.

If we pull back, rental price explosion in the urban core is a function of three things, geography, growth and inequality. Geography: rent gradients are unavoidable, and geographic features like being situated on a peninsula, isthmus or island exacerbate them. Growth attracts in-migration and is one of the prices cities pay for success. The third, inequality, is the hidden beast behind housing unaffordability, and it was only obliquely touched on in the article. As a society we pay a steep price for the increasing disconnect between the fortunes of the top stratum and everyone else. One is that their demand for scarce goods drives up the cost for the rest of us. Housing is perhaps the most important example.

So what to do? I’d like to see some numbers on flippage in San Francisco. My prior would be that, compared to the three factors above, it’s a minor aspect. On balance it might slow the dissolution of social capital a bit. You could go after geography by filling in the bay and turning it into high-density housing; this would have a rather larger impact, but I wouldn’t recommend it. More investments in mass transit (BARTrification) would be a better way to change the geography of housing prices and would be beneficial in other respects. That ought to be at the top of the list.

Even so, extreme inequality remains corrosive of neighborhood stability and just about every other communal value. Even Hong Kong, where about half the housing is publicly owned and deeply subsidized, has been plunged into a housing crisis due to geography, growth, but especially the shift to development aimed at the super-rich. Cities can’t solve this problem on their own.

1 comment:

SF demand is elastic. How could it be otherwise? Many more want to live here than can. Rents have gone up to ration what is available.

> house prices would fall

There would also be a business opportunity for developers to partner and leave owners in place. But the tax seems not to be passing.

> supply on prices

SF supply is constrained by the Planning Department. It will to a first approximation be the same with rents doubling, or halving.

> rental-to-price ratio.. constant

Rent/price is ~+100% the past several years.

> what percentage increase in the housing stock [is] 30,000 units

~8.5% of occupied units. A Rotes Wien program that added sixty or ninety thousand units would really do something. Thirty thousand barely catches up on population growth and removal of units for absentee ownership, Airbnb and Ellis.